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Gaining value in state tax and VAT through improved compliance processes
Jul 27, 2022
When it comes to US state income tax and indirect tax compliance, the need for automation and analytics may sound like a broken record. Unfortunately, while some companies have made strides in recent years to upgrade the tax function, many companies are far behind the curve when compared to “industry leading” state tax and value-added tax (VAT) compliance and reporting practices.
The opportunity costs of adhering to legacy processes in an era of increasing data complexity and constrained resources are often high. By adopting leading state tax and VAT compliance and reporting practices, companies can gain insights and grow their bottom line while improving compliance and limiting risk.
The need to improve
Data sizes are increasing as transactional volume grows and commerce shifts to the cloud. An active mergers and acquisitions environment compounds data management and compliance challenges. The challenges for state and local tax and global VAT compliance grow along with the business risk of failing to prioritize the compliance and reporting process.
For state income taxes, companies should deal with data-intensive market-based sourcing methodologies, changing administrative interpretations, and tax base complexity. For sales and use taxes, the post-Wayfair environment has resulted in new compliance obligations and the expansion of tax bases to services and digital products. And for global VAT, international business has increased the volume and complexity of data at the same time that global VAT reporting obligations are growing, including real-time reporting.
State tax and VAT compliance and reporting evolution
While many companies remain stuck using manual processes, in recent years, some companies have moved to transform their data management and use alternative technologies such as bots to more efficiently import data into their tax software.
Beyond that, however, some companies are taking the next steps toward industry leading practices, such as developing company-specific key performance indicators (KPIs), tying into ERP systems to get directly to the source data and help manipulate that data on an automated basis, and adopting dashboards that allow auto-comparing their data to workpapers and returns in real time.
The results are impressive:
- For state income taxes, these companies are able to auto-compare workpapers updated in real time back to the return, analyze variances, and prioritize higher risk returns for review. Thousands of hours can be removed from the compliance process using less resources, allowing returns to be done in spring rather than late summer or up against the state extended filing deadline. Beyond compliance, however, an industry leading approach provides data insights supporting modeling and planning and the cash tax savings that may result.
- For sales and use taxes, these companies use automation and dashboards, allowing them to help manage disparate transactional data sources, see how the data translates to the various state and local tax returns, analyze trends, and remediate issues before filing. In addition to helping reduce compliance staff time and managing the daunting monthly filing process, an industry leading approach identifies tax savings and refund opportunities through advanced analytics, including artificial intelligence, as well as provides reconciliation and audit support.
- For global VAT, these companies tackle granular data from more sources in real time by reconstituting the supply chain and showing the flows to individual transactions. Data analytics fix tax coding at the source, often resulting in a better compliance experience and positive financial impact. An industry leading approach enables companies to understand where overpayments are happening and how to address them systematically to help achieve continuing tax savings over the long term.
A business imperative
It is becoming increasingly clear that companies can only delay compliance and reporting process improvement for so long. While many companies remain wedded to their longstanding compliance methods, the business realities and accelerating market trends will likely require improvement.
There is simply too much risk of noncompliance, too much wasted staff time amid limited resources, and too many overpayments and missed savings to stand on the sidelines. It is time to consider what industry leading companies do and how to implement these technologies and strategies to help improve processes and the bottom line.
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